SIPP, Hargreaves Lansdown and Funds 2006 (dunstonh)

optimist_2

Hello,

I am trying to pick up a thread from April 2006. In summary, it was about the relative merits of SIPPS, especially HL, in comparison with hybrid SIPPs, or PPPs - Platform Personal Pensions? I hope I have understood the terminology correctly!

I am currently investigating switching pension funds into a SIPP (eg HL/Alliance Trust) or hybrid SIPP. I think Selestia is now Skandia?

Could you help me with a couple of things?

In the thread, dunstonh said that the hybrid SIPP, being adviser led, was fully regulated. And yet HL is also regulated by the FSA. Please can you explain the difference.

Secondly, you said that the Skandia product does automatic annual rebalancing free of charge. I understand this realigns your portfolio with your investment goals and objectives. Who does this, and after the initial asset allocation, does this eliminate the need for separate investment advice outside of the product?

Thank you

dunstonh

I am trying to pick up a thread from April 2006.

Things have moved on a lot since then.

Hybrid SIPPs have sort of faded away a bit. They still exist but are less common now as platform personal pensions and full SIPPs have got cheaper.

I think Selestia is now Skandia?

Skandia Investment Solutions (not to be mixed up with Skandia Life)

In the thread, dunstonh said that the hybrid SIPP, being adviser led, was fully regulated. And yet HL is also regulated by the FSA. Please can you explain the difference.

Without context of the thread in question it probably relates to advice vs DIY. If you use an IFA you get consumer protection on the advice given. If you DIY you dont get advice protection as you havent taken advice (even where marketing from the provider can often be interpreted that way). The actual product and investments get the same level of protection.

Secondly, you said that the Skandia product does automatic annual rebalancing free of charge. I understand this realigns your portfolio with your investment goals and objectives. Who does this, and after the initial asset allocation, does this eliminate the need for separate investment advice outside of the product?

The automatic rebalancing option will rebalance back to the original fund split. It does not adapt to changing economic circumstances and the allocations are not revised. For changing sector allocations, that falls under advice (or DIY) and changes need to be made manually.

An example of that would be property sector. Had you invested back in 2006, you would have had around 20% in property. In 2007 the sector allocations fell back to 5% and for a period nil for property before going back up to 15% late in 2009. A servicing IFA doing rebalancing using the adaptable sector allocations would adjust with their reviews with you.

The automatic rebalancing would always revert back to what it was on day 1 (unless you manually change it). The automatic rebalancing is computerised and happens on a fixed day at a fixed frequency. Its better than letting it go out of sync (which is where many lazy investors go wrong). However, having adaptable rebalancing is more effective in my opinion.

optimist_2

Thanks very much. You say that things have moved on a bit since 2006. I remember that at the time you had your own pension with Selestia which was a hybrid SIPP. Would you still recommend hybrid SIPPs, or is it more a case of PPPs, of which I think the Skandia Collective Retirement Account is an example. What is the difference between hybrid SIPPs and PPPs?

dunstonh

I remember that at the time you had your own pension with Selestia which was a hybrid SIPP. Would you still recommend hybrid SIPPs, or is it more a case of PPPs, of which I think the Skandia Collective Retirement Account is an example. What is the difference between hybrid SIPPs and PPPs?

My pension is still with them. Its more a case of the terminology adjusting. Back in 2006, there were only a handful of providers that offered unit trusts in a personal pension. So, at that point, they were not SIPPs but they were not conventional personal pensions either (in that they dont use pension funds). So, they were bundled in the hybrid SIPP category. Now, you tend to refer to them as platform based pensions of which there are far more compared to back then.

What is the difference between hybrid SIPPs and PPPs?

A hybrid SIPP was seen as an in-between option between personal pensions and SIPPs. Today you would consider hybrid sipps to mean a personal pension with add on SIPP functionality. So, it can be used as a personal pension or a SIPP or a bit of both.

A personal pension is an insured contract that isnt offering SIPP functionality (although to confuse more, many hybrid SIPPs which are not using sipp functionality are referred to as personal pensions).

I am actually not a fan of hybrid SIPPs if you are intending to use SIPP functionality. Some of the hybrid SIPPs are actually quite cost effective personal pensions but once you use the SIPP functionality they tend to be expensive).

optimist_2

Thanks again. I have been trying to get my head around this for a while. As I understand it, hybrid SIPPs have evolved into PPPs, which are essentially Personal Pensions behaving like a SIPP.

You said that full SIPPs are a lot cheaper now. Yet as an adviser, with all the investment experience this brings, you have not bothered with SIPPs, but have chosen to stick with the Skandia CRA rather than, for example, Hargreaves Lansdown, Alliance Trust or SippDeal etc.

What do you see as the advantages of the Skandia product in this context, if PPPs and SIPPs are both platform based products that are essentially the same?

dunstonh

You said that full SIPPs are a lot cheaper now. Yet as an adviser, with all the investment experience this brings, you have not bothered with SIPPs, but have chosen to stick with the Skandia CRA rather than, for example, Hargreaves Lansdown, Alliance Trust or SippDeal etc.

Its about functionality and cost. I take the view that you should pick the right product to match your needs and objectives and go with the most cost effective one that achieves those. If thats a SIPP then so be it. If its a personal pension then so be it.

SIPPs are still typically more expensive than personal pensions when using funds. The gap is just much smaller than it was. However, most people dont want SIPP functionality. So, why pay for it.

There are estimates that around 90% of SIPPs arranged post A day only hold investment funds. Effectively, they are being run like personal pensions. We have seen people on here post that they transferred out of a personal pension investing in a fund costing 1% TER into HL's SIPP using HL's MM funds with a TER of nearly double that whilst thinking they were using a low cost option. I do believe that SIPPs are oversold and over bought. They become a fashion product. They were the ipod/iphone of pensions. If you had a personal pension you were considered old fashioned. If you have a SIPP you are trendy. Smart money shouldnt think that way.

What do you see as the advantages of the Skandia product in this context, if PPPs and SIPPs are both platform based products that are essentially the same?

As it stands, it is cost mostly along with simplicity. There are no initial charges and no switching charges. There is no cash account to monitor (where cash accounts are used, they require more monitoring which is fine for servicing clients but no good for the inexperienced investor who wants more buy and forget). It doesnt have many of the bells and whistles of the other platforms but if you are not using those features then does it matter? If you want those features then you are paying for them.

Remember that I am looking at this from the IFA side. People who DIY wont have some of the issues that an IFA has to deal with.

optimist_2

Thanks. So a SIPP can become a fashion accessory. By the additional functionality of a SIPP, I think you are referring to the provision of Investment Trusts, ETFs and shares, but I read somewhere that the first of these two were to be introduced to PPPs in the near future, anyway.

Apart from the IFA view, why do you as an individual prefer to have your pension in the Skandia CRA?

When you say there are no initial charges, doesn't this depend on finding an IFA who is willing to provide an execution only service, and also rebate trail commission? In this scenario, I assume that management would still have to be done through the IFA, as these products cannot be managed directly by the individual investor, which is obviously central to the SIPPs culture.

What would be the situation if you went through a discount broker such as clubfinance - who would be eligible to manage the PPP in this case? Is it also true that you cannot go into drawdown from a product that has been set up on an execution only basis?

Going back to the regulation question, as I understand it, if the IFA provides advice on the appropriateness of the transfer, you will be protected against poor advice. If you go down the execution only route, you make the decision on whether to transfer, but the mechanics of the transfer itself is protrected. Who is more responsible - the transferor or the transferee? If an IFA provides an execution only service, but then advises for a fee on fund investment, what is the situation as regards protection here?

dunstonh

argh, posted a response and it timed out and lost it.

Here we go again.....

By the additional functionality of a SIPP, I think you are referring to the provision of Investment Trusts, ETFs and shares, but I read somewhere that the first of these two were to be introduced to PPPs in the near future, anyway.

Yes, that is all on its way. Ultimatly, there will probably end up being virtually nothing between SIPPs and platform PPPs in the end.

When you say there are no initial charges, doesn't this depend on finding an IFA who is willing to provide an execution only service, and also rebate trail commission? In this scenario, I assume that management would still have to be done through the IFA, as these products cannot be managed directly by the individual investor, which is obviously central to the SIPPs culture.

You can do valuations and fund switches yourself. Only single premium top ups need the IFA to submit them.

What would be the situation if you went through a discount broker such as clubfinance - who would be eligible to manage the PPP in this case?

All IFAs can be discount brokers. Its just a case of whether they want to or not. Someone with a £100k pension could offer an IFA £500 to put the pension with Skandia with trail rebated. Some may say no, some may say yes. I do fear a little for online discount brokers as the Retail Distribution Review is going to kill their income source. Not overnight but it will be in decline as agency transfers after 2012 will stop the trail/renewal commissions being paid.

So, I would look to a post RDR compliant contract now. Although most are holding back to the see what the FSA's platform paper is going to say in June/July. If the FSA ban bundled platforms (which is looking more likely now) then the likes of HL etc are going to have to change their business model. Products and charges will be altered.

If you go down the execution only route, you make the decision on whether to transfer, but the mechanics of the transfer itself is protrected. Who is more responsible - the transferor or the transferee?

Neither is responsible. You are the one overseeing it.

If an IFA provides an execution only service, but then advises for a fee on fund investment, what is the situation as regards protection here?

Execution only means no advice. If you later go for fund advice it is treated a second transaction with that particular one being advice (and with advice protection).

optimist_2

Sorry you had to write it again, but it's all really useful stuff!

So if the adviser advises on the transfer, he will be responsible for overseeing it - would the transfer be included in the £500 example you quoted? Beyond filling in the initial forms, is there much legwork to do on this, or does that vary from one case to the next. I know from experience that insurance companies can sometimes be very slow - is there guidance on how long the transfer should take, as there is now in the case of cash isa switches? Also, my transfer will be from an FSAVC. I gather this is called a switch, and is more straightforward than transferring in from an occupational pension, for example.

Can you elaborate on your comments about the Retail Distribution Review (RDR)? Am I to understand that, if I purchased the plan through an online discount broker now, the favourable terms might not last into the future, and therefore be changed retrospectively? Also, that bundled platforms (like HL and Alliance Trust) may become more expensive in the future? Isn't the Skandia platform bundled? What is a post RDR compliant contract likely to be?

Does another part of the review concern transfer-in and transfer-out charges between platforms. Aren't these due to be axed by the FSA?

Thanks!

jamesd

The advisor wouldn't necessary be responsible for any overseeing beyond the initial sale work. It depends on what you're after.

Say you want the IFA to pick which is best for you. Then the IFA has to do lots of research and take the risk of trouble later if it turns out to be wrong - so a fair bit more work and exposure for the IFA, because it's an advised sale.

Alternatively you might ask an IFA to tell you the prices of some options and you pick based on your own analysis, so the IFA isn't making an advised sale and has reduced liability and compliance work. And since you're ultimately responsible for your pension, you might even prefer this to leaving it all to the IFA.

Try to do it at a quiet time of the year for the IFA and the IFA might be more happy to do the work. Trying to get it done in April would be the opposite, it'd be taking time at their busiest time of the year.

Skandia is bundled, like HL, though cheaper. The RDR could ban bundled platforms. If it did then there would probably be some combination of annual charge (say £50), platform charge (maybe 0.3% of the money invested each year) and possibly some charge to replace the 0.5% trail commission that a place like HL takes. But the fund annual charge might be 0.8% or so lower because the fund manager isn't now having to pay those charges out of its annual charge. One of the possible reasons for banning it is incentive payments made by fund houses to platforms.

Skandia is working on a new product. What your chosen IFA would do after that is introduced depends on the IFA. Some might bundle a free transfer with the initial sale to remove the need to wait and hiccup in their sales that might come if everyone wanted to wait. Others might treat it as another sale. Up to you to discuss with your chosen IFA and find an appropriate deal.

I'm discussing using one of these products to replace HL's SIPP to save ongoing cost while combining it with a just-replaced work pension pot that's no longer getting money added to it. I don't really want or need any ongoing servicing so I'm trying to eliminate that, though Skandia would currently want an IFA to do any future transfers. For me it's simply about getting the range of investments I'm after at the lowest viable ongoing cost, or at a higher cost for more features if I decide that's worth paying for. I'm in no great hurry so I can wait for the RDR dust to settle.

HL charges full retail trail commission so if you have a fair sized pension pot it'll pay you to get an IFA to sell you something like Skandia with no ongoing trail commission (unless you want ongoing servicing). That should eliminate at least 0.5% of your pension pot value in charges each year. That's enough for someone with a £100,000 pension pot to have the savings cover a £500 IFA fee in a year.

Transact is available both as a personal pension and as a SIPP. Same features, just two different technical types of pension.

dunstonh

So if the adviser advises on the transfer, he will be responsible for overseeing it -

No. If you employ the adviser on a transactional basis then they are responsible for making sure the transfer is suitable and the initial investment is suitable. They have no responsibility beyond that. If you employ the adviser on a servicing basis, then you will get ongoing servicing.

Also, my transfer will be from an FSAVC. I gather this is called a switch, and is more straightforward than transferring in from an occupational pension, for example.

More straight forward but it has some mandatory requirements. e.g. you have to benchmark that and the alternatives to stakeholder. If more expensive then you need to justify why.

know from experience that insurance companies can sometimes be very slow - is there guidance on how long the transfer should take, as there is now in the case of cash isa switches?

No guidence there. Typically its 3 days to 4 weeks. My longest has taken 18 months. Although that was pre A day and things a bit easier now.

Isn't the Skandia platform bundled?

It is but its a bit in between as it has a platform charge and a number of institutional funds. Because of the increased use of institutional funds (non commission paying) Skandia had to increase their platform charge a bit more. There are more non commission paying investments coming to Skandia. I wouldnt be surprised to see the platform charge increase further but if you have a £100k on platform and your charges are 0.3% p.a. cheaper than thats £300 saved. A platform charge increase of £18 a year is no big deal in that case.

As James says, Skandia have said they plan to offer both options if the FSA don't ban bundled platforms.

Can you elaborate on your comments about the Retail Distribution Review (RDR)? Am I to understand that, if I purchased the plan through an online discount broker now, the favourable terms might not last into the future, and therefore be changed retrospectively?

They will remain in place but if you fund switch the new fund will cease to be a commission paying one. For discount brokers online that use the commission to pay their fees, they could struggle if people start to fund switch. With no hidden commissions and not being paid the IFA commission any more, they will have to introduce explicit fees.

Does another part of the review concern transfer-in and transfer-out charges between platforms. Aren't these due to be axed by the FSA?

No. The FSA are forcing re-registration to be made available. At the moment its optional. A platform can still have explicit charges if they want though.